Blockage Discounts
What is a Blockage Discount?
A blockage discount is a valuation adjustment applied when a large block of publicly traded or restricted shares is transferred or appraised for tax purposes. The discount reflects the reduction in fair market value that occurs because selling such a substantial holding in a reasonable time frame would likely depress the market price.
The IRS recognizes blockage discounts as a legitimate adjustment under Internal Revenue Code Section 2512 and related Treasury Regulations, which define fair market value as:
"The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts."
When valuing publicly traded securities in estate tax, gift tax, or charitable contribution scenarios, you must consider whether a blockage discount is appropriate.
Why You May Need a Blockage Discount Valuation for Tax Purposes
Blockage discounts are commonly applied in these situations:
Estate Tax Valuation: When a decedent held a large block of public company stock.
Gift Tax Reporting: When significant shares are transferred to family members or trusts.
Charitable Contributions: When donating a substantial block of stock to a qualified organization.
Tax Planning: When modeling the impact of gifting strategies over time.
Without a proper blockage discount analysis, you risk:
Overstating the taxable value of the transfer
Paying higher estate or gift taxes
Increased likelihood of IRS audit or challenge
Delays in closing the estate or processing deductions
A professional blockage discount appraisal ensures compliance, supports your tax filings, and withstands IRS review.
When a Blockage Discount Applies
A blockage discount may be appropriate if:
Your holding exceeds normal daily trading volume.
The shares are subject to trading restrictions or lock-up agreements.
Liquidation of the block in a short period would materially depress the market price.
How Blockage Discounts Are Determined
At Wyckoff Valuation, we apply established, widely-used and commonly accepted methodologies to quantify the appropriate discount:
1. Market Impact Analysis
We analyze how much time and trading activity would be required to liquidate the block without materially affecting price, considering:
Historical trading volumes
Average daily trading values
Share liquidity and volatility
Bid-ask spreads
2. Empirical Studies
We reference academic research, published studies, and historical data on large-block transactions and their observed discounts.
3. Liquidity and Volatility Adjustments
We incorporate factors such as market risk, expected holding period, and restrictions affecting when and how the shares could be sold.
4. Restricted Stock Considerations
If shares are subject to limitations on transfer, we apply an additional Discount for Lack of Marketability (DLOM) alongside the blockage discount.
Why Blockage Discounts Are Recognized in Tax Valuation
Both the IRS and Tax Courts have consistently recognized blockage discounts in appropriate circumstances. Key authorities include:
Revenue Ruling 77-287 - Provides guidelines for valuing restricted securities for federal tax purposes. These are securities that cannot be immediately resold because they are restricted under federal securities laws.
Estate of Charles A. Borgatello v. Commissioner (2000): The Tax Court applied a marketability discount in valuing a real estate holding company, illustrating that courts routinely recognize valuation discounts tailored to the specific liquidity and transferability of assets.
Estate of Georgina T. Gimbel v. Commissioner (1996): A well-known blockage discount case, where the court valued a large block of publicly traded stock by calculating the present value of expected sale proceeds and dividends over a disposal period. This approach reflects the real impact of liquidating a sizable position on fair market value in estate tax appraisals.
Estate of Newhouse v. Commissioner (1990): The Tax Court accepted substantial valuation discounts for lack of control and lack of marketability when appraising closely held stock for estate tax purposes. The ruling emphasized that fair market value must reflect what a hypothetical buyer would pay, not just theoretical figures, strengthening the case for well-supported discounts.
Estate of Andrews v. Commissioner (1982): This case highlighted that estate tax valuation must consider all relevant market factors as of the date of death, including discounts for lack of control and lack of marketability. The decision supports applying real-world adjustments to fair market value rather than relying solely on quoted prices.
These rulings support the principle that fair market value must consider the economic realities of liquidating a large block, rather than assuming immediate sale at quoted market prices.
Risks of Ignoring or Underestimating Blockage Discounts
Failing to apply a credible blockage discount can result in:
Excessive estate or gift tax liability
Inaccurate charitable contribution deductions
IRS penalties for substantial valuation misstatements
Audit challenges and prolonged disputes
A well-supported blockage discount valuation protects your filings and demonstrates good-faith compliance.
How Wyckoff Valuation Delivers Defensible Tax Appraisals
At Wyckoff Valuation, we provide independent, IRS-compliant blockage discount appraisals for tax planning, reporting, and compliance.
Why clients trust us:
30+ Years of Experience valuing large equity positions for estate, gift, and charitable purposes.
Fixed-Fee Pricing for clarity and predictability.
IRS-Accepted Methodologies consistent with tax regulations and precedent.
Detailed, Fully Documented Reports prepared to withstand scrutiny.
Responsive Senior-Level Support to answer your advisor or tax counsel’s questions.
Frequently Asked Questions
Is a blockage discount allowed by the IRS?
Yes. When the size of a block would reasonably affect its price in the open market, a blockage discount is recognized under tax law.
How long does the appraisal process take?
Typically 2–4 weeks, depending on complexity and responsiveness of data.
Can you coordinate with my tax advisor?
Absolutely. We regularly collaborate with CPAs, estate attorneys, and wealth advisors to ensure consistency with your overall tax strategy.
Get a Blockage Discount Valuation You Can Trust
Avoid overpaying estate or gift taxes, and protect your filings with an independent, IRS-compliant appraisal.
Wyckoff Valuation delivers blockage discount valuations that stand up to scrutiny.
